1. Regulators are considering controlling the emissions from two local power plants. The marginal benefits (the demands for effluent) derived by these plants from being able to produce a given quantity of effluent are 10,000-Q1 for the first plant and 10,000-2*Q2 for the second facility (where Q1 and Q2 are the quantities of effluent).
a. Graph these two individual pollution demand curves and indicate the levels of pollution (both graphically and numerically) that will be produced by these plants in the absence of regulation.
b. Find the total demand function for effluent implied by these two individual firm demand functions and add it to the graph above.
c. Suppose that the damage from the effluent is MC=2*(Q1+Q2)=2*Q. Add this function to the graph in part (a). What is the efficient level of effluent?
d. Regulators are considering a policy that obligates each plant to limit its emissions to half of the efficient level of total pollution you found in the previous question. Illustrate this policy on a new graph and calculate the total control (abatement) costs of this policy.
e. Acting as a consultant to regulators, you suggest that an alternative might be to impose a tax on each unit of effluent. What would the tax be if it were set at the level to achieve the efficient total amount of effluent? How much effluent would be produced by the two firms?
f. Calculate the control costs under the tax policy and compare their total to that achieved under the command and control policy in (d). Which policy is more cost effective? Why do you expect this finding to be true in general?